What Is Your Goal?

There are numerous methods to reduce your income tax burden. One such way is to ensure all of your business expenses are captured and accounted for. Another such way is to utilize a cost segregation study. Yet another way is to utilize Net Unrealized Appreciation. Another way to reduce or defer taxes is to contribute to a retirement plan. Of the various methods that exist, care should be taken to ensure that all available methods have been considered.

This is an incredibly large purchased and when financed, can be very rewarding and expensive. You should consider the various factors involved in purchasing a home such as the amount of interest you will pay overtime versus various savings rates. 

If you are considering retiring early, a major consideration is how you will finance your retirement. In other words, where will you receive income and how will you use your savings to create an income stream for yourself.

 What is the most effective way to save for retirement? How much will you need for retirement? How much should you spend in retirement? What will you use to fund your retirement? What are your sources of income in retirement?

Should you pay off your student loans, or should you pay the minimum payment? Should you payoff other higher or lower interest loans instead? Should you invest money in the stock market instead of paying off high interest student loans? An interest rate analysis should be performed to consider how to allocate your capital. One should not simply consider the interest rate, but the loan amortization and the implication of taxes. For example, a 6% student loan is not the equivalent of a stock that pays a 6% dividend because the student loan is after tax and not deductible while the dividend is subject to federal income tax at preferential dividend rates. Notably, the minimum payment however on the student loan will be higher than the dividend payment from the stock because the student loan minimum payment includes accrued interest plus principal. Therefore, simply comparing interest rates may not be an endpoint in your analysis.

Before you are considering investing in the stock market, you should consider the purpose of your money. In other words, what do you want to do with this money? If your time horizon to save the money is longer than 3 years, than an investment in equities is a possibility. If your time horizon is shorter, than you should also consider other options such as bank deposits, CDs, brokered CDs, money market investments, treasury bonds, and corporate investment grade bonds. 

Investing in real estate should be considered in the context of your total net worth. There are various ways to get exposure to real estate investments, such as purchasing shares in a REIT or other pooled real estate investment. One could also directly invest in real estate by purchasing a property. Like equities, we believe the time horizon for the investment should be longer than 3 years partly because real estate is illiquid and has high transfer costs. Further, because real estate is not commoditized, there are fewer bidders resulting in less liquidity. Transaction costs are high because selling or buying real estate involves brokers’ commissions and attorney’s fees. Furthermore, generally retail real estate is valued based upon comps (comparables), which in rising markets, tends to render subsequent values higher, and in falling markets, tends to render values lower, than the comps. Commercial real estate is subject to the same valuation methods, however, we have seen the income approach and replacement cost (building cost) valuations. The income approach is closely related to the so-called Cap Rate valuation of real estate which generally values real estate based upon the sum of gross rents less operating expenses divided by the acquisition price, quoted as a percentage. Real estate usually involves a significant amount of financial leverage, mortgage, while equities are generally not significantly levered. Real estate has the added advantage of permitting the purchaser to use cost recovery, depreciation, on the personality (buildings) which is a non-cash expenditure taken as a deduction against taxable income, subject to depreciation recapture. This is an interest free loan, so it can be very powerful. 

Have you prepared for the inevitable tax consequences of the sale of your business? Uncle Sam is your silent partner. Are you selling your business as a share sale or as a deemed liquidation or asset sale? How will you be taxed upon the distribution? How will the sale be structured? Earnout? The last thing you need is to have no plan to divest from your business in the event of an unforeseen circumstance. Further, tax planning becomes more limited after you sell your business or pass away. It is better to consider tax issues far in advance of the inevitable. 

Florida has significant advantages, such as beautiful subtropical weather, abundant healthcare, affordable quiet living, communities geared to mature and senior citizens, and low personal taxes. When moving from another state to Florida, you should check with an attorney to ensure you have sufficiently severed ties from your prior state including filing the correct non-resident form in the year of exit. Another resident of Florida is the so-called snow-bird–a person who resides in another state but lives in Florida during the winter months. Interesting tax problems present themselves with these dual citizens. 

A financial plan is important to organize your current financial resources and the priorities of how the money will be used for the financial well-being of the family. A financial plan should be done annually or at least every other year. A financial plan helps determine whether the family is on path to achieve their financial goals or whether more work needed to avoid a shortfall. One of the biggest benefits is setting goals for your money. This actually will help you avoid making bad investments. 

There are various savings vehicles that provide tax advantages to use when saving for a child’s future. For example, there is a 529 plan account which you can contribute and grow the money tax free provided it is used for higher education expenses. There are series EE savings bonds which accumulate interest tax free from higher education expenses. Also, there are appropriate titling of these accounts is imperative to ensure your child is not disadvantaged due to assets which exceed FAFSA thresholds for student loan and scholarship eligibility.

Your loved ones may have provided you with an inheritance but possibly not expressed how this money may fit into your financial needs. Is your inheritance an extension of their goals or yours? You should also consult a professional so you can try to preserve the money and use it for a legitimate purpose and not make unwise or overly risky investments. 

Congratulations! It looks like you have a liquidity event! Have you considered how you should use the proceeds of the liquidity event can be used to create an income stream (paycheck) for your life. Would you like to invest the money into another project? Have you considered the risks associated with starting at 0 again? 

Life insurance is important to fund a potential shortfall in assets you leave your family in the event of a death of an income provider. Insurance can also be used to provide a tax-free income source in retirement or after passing. There are several types of life insurance including term, whole life, universal life, and variable universal life. Term is usually for a term while whole life is permanent. Finally, there is key-man insurance for a business if one key officer passes, the business or other owner can buyout the deceased person’s shares and the deceased person’s family can receive income upon the passing of their family member.

Congratulations! A consideration is to plan for college funding, and for special needs planning if necessary. Also, you could start out saving for your kids to pay for a wedding or buying a home in the future to give them a head start.

Congratulations! Now what do you do? Many people expand their lifestyles and begin spending more without correspondingly increasing their savings, and importantly increasing their tax contributions. Even if your employer withholds taxes, in cases of people who are married filing jointly, the tax contributions are insufficient to prepay income tax. This is especially true for people who have second jobs, are entrepreneurial on the side, and are self-employed or have profitable businesses that they own but do not pay themselves salaries. 

What is the most tax efficient way to give to your charity? Have you considered the difference between a charity and a non-profit? Have you also considered the difference between and charity and a foundation? Or an operating foundation and a nonoperating foundation versus a grantmaking foundation? One key consideration is what will the function of the exempt organization be? What will it do? When you consider precisely what endeavor the charity undertakes, it becomes easier to create an entity and plan accordingly.